Articles and news about FHA loans and HUD requirements. FHA loans are great for first-time homebuyers.

Monthly Archives: June 2014

FHA Loan FICO Score Rules: A Reader Question

055A reader asks, “How low can a credit score be? i know mine is about 540. If it is for low income people with BAD credit why should the score matter at all?”

The FICO score question has two important aspects borrowers should be aware of. FHA loan rules establish a minimum FICO score requirement. HUD 4155.1 includes a chart to show the FICO minimums and how maximum financing is affected depending on what the borrower’s FICO score is within these ranges:

FHA CREDIT SCORES FICO

FHA minimum scores are just that–the minimum numbers required. Lenders can and often do have more strict FICO score rules than what you see printed above. There’s no such thing as a “bad credit FHA home loan”. Borrowers who do not meet the minimums listed above can’t be approved for an FHA home loan or can’t be approved for maximum financing depending on the circumstances as detailed in the chart.

A common misconception about the FHA loan program is that it is for first-time homebuyers, or that it is for low-income borrowers, or that FHA loans are ONLY for people who couldn’t afford the down payment on a conventional mortgage loan, or other variations on these themes.

The truth is, no minimum OR maximum income limits are established for FHA loans. FHA loans are simply an alternative to conventional loans with more forgiving terms written into the program by the FHA.

Borrowers are still required to credit-qualify for the loan and demonstrate they are a good credit risk. Hence the FICO score requirement and the scrutiny of debt-to-income ratios and other financial factors.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

 

FHA Appraisals and Required Corrections: A Reader Question

095A reader asks about a refinance loan situation where “an appraisal is done there’s a recommendation of installing an electric line water heater and roof sealing, can the loan be approved without doing these improvements or can the cost be added to the mortgage loan to do so?”

If the FHA appraiser recommends corrections or alterations, these are usually done as a condition of loan approval and may require a compliance inspection to insure they have been accomplished. However, the second part of this reader question does offer the borrower some possibilities when the borrower is required to pay for the fixes.

According to the FHA loan rules published in HUD 4155.1 Chapter Two, Section A, under the heading titled, “Adding Repair and Improvement Costs to the Sales Price” we find the following:

“Repairs and improvements may be added to the sales price before calculating the mortgage amount when the repairs and improvements are
− required by the appraiser as essential for property eligibility, and
− paid by the borrower, and sales contract or addendum identifies the borrower as responsible for payment, and completion of the repairs.

Important: Only repairs and improvements required by the appraiser may be included.”

That’s the rule for new purchase FHA loans, but what about refinancing loans? According to HUD 4155.1, for Streamline Refinances, “FHA does not require an appraisal on a streamline refinance. These transactions can be made with or without an appraisal. FHA does not require repairs to be completed on streamline refinances with appraisals, with the exception of lead-based paint repairs. However, the lender may require completion of repairs as a condition of the loan.”

And for cash-out refinance loans? According to HUD 4155.1, these instructions to the lender apply:

“Add the following to the existing first mortgage amount:

• any purchase money second mortgage
• any junior liens over 12 months old
• closing costs
• prepaid expenses (even if the lender refinancing the loan is the servicer)
• borrower-paid repairs required by the appraisal, and
• discount points.”

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loans For Schoolteachers: A Reader Question

058A reader asks, “My daughter is a schoolteacher. Where she lives, they do not give new hires full time jobs, but hire the teacher part time all the time so they do not have to give benefits. Can she get an FHA loan? Her total need would be $400,000 for the house less a 20% down payment, which she has. She has been working for a long time under this arrangement, but is not classified a a full time teacher. Her mother or I could co-sign for her if necessary. We are both retired but have verifiable incomes and property well in excess of the total loan amount.”

FHA loan rules permit co-signers, non-occupying co-borrowers and other arrangements, so the answer to this question where that is concerned is that technically yes, such an arrangement is permitted. However, the credit and income for all co-borrowers would be considered and it’s important to remember that FICO scores, loan repayment history and other financial qualifying factors would apply in these circumstances.

The larger-than-required down payment mentioned in the reader question would be considered as an additional compensating factor and may prove to be a big help.

It’s also good to remember that FHA loan rules do not include a minimum amount of income. Rather, the borrowers current debt is compared to the amount of income and calculations are made to see whether the borrower could afford the loan based on the verifiable income versus the amount of monthly debt. A co-borrower situation would improve changes of FHA loan approval assuming all borrowers qualify.

Cases where the borrower is employed part time may not count against the applicant, especially if there is a longer history of employment in the same job. This situation may not be a liability when it comes to FHA loan approval, but your experience may vary depending on the lender.

It’s best to discuss these options with a loan officer to get advice on what might be expected from that financial institution. Again, your experience may differ from one lender to another, so it’s best to shop around for a lender willing to work with you.

Do you have questions about the FHA home loan program? Ask us in the comments section.

FHA Loans For Second Homes? A Reader Question

055A reader asks, “I would like to know how hard it is to get a loan on buying a second home. Our credit scores are 649 and 685. Before anyone runs our credit again, my husband makes 2000 a month plus we get SS of 2500 a month.”

The answers to this reader’s questions depend greatly on a number of factors not mentioned in the question. First there’s the question of the first home–is there an existing FHA mortgage? FHA loans for new purchase transactions require occupancy and borrowers are not permitted to apply for FHA loans for homes they don’t plan to occupy as their full time residence.

FHA loans for single-family homes are intended for borrowers to purchase for their own occupancy and an FHA single family mortgage can’t be used on an investment property.

Occupancy issues aside, FHA loan qualifications include calculating the borrower’s debt-to-income ratio. A borrower with an existing mortgage loan could theoretically be able to afford a second mortgage assuming there’s enough income to qualify, but for many borrowers the debt to income ration in such cases could exceed FHA limits.

The third issue with the situation suggested by the reader question involves the borrower’s creditworthiness. A borrower who has an excellent payment record and who has FICO scores that fall within the lender’s standards may be able to qualify, but in a situation where there may be a high debt to income ratio–one close to the limits of what the FHA loan program and/or the lender’s standards, any marginal repayment history would make the loan very hard to justify.

In any new home loan transaction, it’s recommended that the borrower come to the application process with at least 12 months of reliable payments, but that record is even more critical when there are factors such as a higher debt to income ratio.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Refinance Loans and HELOC: A Reader Question

099A reader asks, “We have an old home built in 1924 in Vallejo, CA. We took a HELOC on the property in 2006 when the home appraised at around $450000. The loan was structured as 10 yrs. interest only payments, which will become principal and interest at the then current HELOC rate in Oct. of 2016.

“The home is now worth about half of its prior value, and we are worried about what the HELOC rate will become in 2016. We still owe $244,000 and a house around the corner sold for $235,000. Is there an FHA loan we can qualify for to help get out from under this situation? We have excellent credit(over 760 each)and income around $120000 annually, with no debt other than this HELOC situation.”

FHA loan rules for refinancing loans do address subordinate liens and HELOC issues. A 2011 FHA Mortgagee Letter clarifying the rules for subordinate liens states:

“If there is an existing subordinate lien on the property, such as a Home Equity Line of Credit (HELOC), the entire lien must be subordinated at refinance. For the calculation of the Combined Loan to Value (CLTV) ratio, the mortgagee must use the maximum accessible credit limit of the existing subordinate lien.”

If an FHA refinance loan is still the route the borrower wants to take (knowing the above FHA rule applies), he or she will need to work with the lender regarding the specific circumstances of the refinancing–there are many issues that can affect loan approval or denial. Lender standards will definitely play a part in the process; FHA loan rules aren’t the only ones that need to be considered when applying.

It’s easy to forget that FHA home loans and refinancing loans are not issued only under FHA rules–the financial institution you’re applying to also has a set of standards and regulations that must be followed in addition to the FHA loan rules, minimum standards, etc. FHA minimums are just that, and a lender may require higher FICO scores, ask for an appraisal and credit check where the FHA doesn’t necessarily require one, etc.

Do you have questions about the FHA home loan program? Ask us in the comments section.

 

FHA Appraisal Rules For Foundations: A Reader Question

108A reader asks, “We are up for a FHA refinance and the appraiser noted that we have a crack in our foundation. We have never had water in the basement ever and it hasn’t moved since i originally purchased the home. We are waiting to hear back from our lender. What is the likelihood this loan will be denied?”

There are several issues that apply in a situation like this including the severity of the foundation problem. Not knowing that specific information makes it hard to know which way the call might go but it’s impossible to speculate what one financial institution might do. But that’s not the most relevant issue at work here.

State or local building code may address the foundation issue specifically. If the home is not up to code, the appraiser may require certain fixes or corrections as a condition of loan approval.

What’s more, the appraiser may or may not have made such recommendations–the reader question doesn’t mention it–and those recommendations would have to be performed with a possible compliance inspection required to insure the corrections or fixes have been made to the appraiser’s satisfaction.

It’s entirely possible that the foundation issue isn’t a problem, depending on the severity and what state or local building code says about the condition of the foundation. In these cases its best to refer to the appraiser’s report on the property to see what corrections are required.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

New FHA HECM Rules: Determining The Principal Loan Amount

063Last week we reported on changes to the FHA Home Equity Conversion Mortgage loan program–changes announced by FHA and HUD that change the terms of the loan program for fixed rate HECMs and adjustable rate HECM loans. As of HECM loans with case numbers assigned on or after June 25, 2014, FHA HECM loans for fixed rate mortgages feature the following restrictions as per the FHA official site:

“FHA will only insure fixed interest rate reverse mortgages where the mortgage limits the mortgagor to:

–A single, full draw to be made at loan closing; and
–Does not provide for future draws by the mortgagor under any circumstances.”

The FHA also made changes to adjustable rate HECM loans–the FHA official site says:

“The Single Disbursement Lump Sum payment option shall not be used for adjustable interest rate HECMs.”

That covers some aspects of FHA HECM payment issues, but a question on many a borrower’s mind involves how the FHA will calculate the principal limit on an FHA HECM loan. According to FHA Mortgagee Letter 2014-11:

“Mortgagees will continue to determine the principal limit according to existing policy guidelines by multiplying the maximum claim amount by the principal limit factor corresponding to the age of the youngest mortgagor, and the expected average mortgage interest rate, until further notice.

“The expected average mortgage interest rate must be the same as the fixed mortgage (note) interest rate and set simultaneously. The principal limit for a fixed interest rate mortgage will “increase” each month by one-twelfth of the sum of the mortgage note interest rate plus the annual mortgage insurance rate, but no further funds may be made available for the mortgagor to draw against after the Borrower’s Advance.”

The mortgagee letter adds that future disbursements, “…from set-aside accounts can be made by the mortgagee for purposes defined for the specific set-aside. Mortgagees may continue to add accrued interest, mortgage insurance premiums, servicing charges and disbursements from repair or servicing fee set-aside accounts to the outstanding mortgage balance for fixed interest rate HECMs in accordance with existing FHA requirements. All other HECM program requirements remain applicable to fixed interest rate mortgages.”

These are important changes and borrowers should be fully aware of them before committing to an FHA HECM loan on or after June 25, 2014.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

 

FHA Announces Major Changes To HECM Loan Program Rules

063In our previous blog post we mentioned some big changes made by the FHA to the Home Equity Conversion Mortgage (HECM) loan program.

HECM loans are for eligible borrowers age 62 or older, and feature no monthly mortgage payment for the borrower, who instead gets a lump sum or regular cash dispersal under the terms of the loan until the borrower either dies or sells the property. That’s when the loan becomes due in full.

Among the new changes announced by the FHA to the HECM program? Limitations on fixed-rate HECM loans and how the money can be paid to the borrower. There’s also a change to adjustable rate HECM loans, and both of these changes are very important for borrowers to understand before committing to this type of mortgage loan.

What are the changes to the fixed rate HECM loan? According to the FHA official site, “FHA will only insure fixed interest rate reverse mortgages where the mortgage limits the mortgagor to:

–A single, full draw to be made at loan closing; and
–Does not provide for future draws by the mortgagor under any circumstances.”

Under the old rules, borrowers could apply for a HECM loan to be paid out in either a lump sum, line of credit, or future cash payments on a regular basis. But now, for fixed rate HECM loans, this is no longer possible.

For adjustable rate HECMs, the following new rules apply, according to the FHA official site:

“FHA will only insure adjustable interest rate reverse mortgages where the payment plan option is either:

–Tenure;
–Term;
–Line of Credit;
–Modified Tenure; or
–Modified Term.

The Single Disbursement Lump Sum payment option shall not be used for adjustable interest rate HECMs. All other HECM program requirements remain unchanged for adjustable interest rate HECMs.”

These changes take effect for all FHA HECM loans with case numbers assigned on or after June 25 2014. For more information, contact the FHA directly by calling 1-800 CALL FHA.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

 

 

FHA Issues Clarifications On HECM Loan Rules

048FHA Mortgagee Letters are issued from time to time from the FHA/HUD to clarify policies, set up new rules, or prepare borrowers and lenders for changes in the FHA program as dictated by law or other means.

Two new FHA Mortgagee Letters were issued recently that discuss changes to the rules and regulations covering the FHA’s Home Equity Conversion Mortgage loan program (HECM).

There are some important changes that affect the HECM program’s basic design and options for qualified borrowers, plus clarification on how the HECM program may be marketed and warnings against deceptive advertising or marketing practices.

One of the most important changes to the FHA HECM program announced by the recent Mortgagee Letters involves limitations to fixed interest rate HECM loans. According to FHA Mortgagee Letter 2014-11:

“FHA will only insure fixed interest rate reverse mortgages where the mortgage limits the mortgagor to:

–A single, full draw to be made at loan closing; and
–Does not provide for future draws by the mortgagor under any circumstances.

Borrower’s Advance means the funds advanced to Borrower at closing as set forth in the HECM Loan Agreement. As there will be no risk of the Secretary having to pay future advances to the mortgagor, the HECM Second Security Instrument and HECM Second Note are no longer required for fixed interest rate HECMs.”

Furthermore, the FHA Mortgagee Letter states:

“Mortgagees shall use the Single Disbursement Lump Sum payment option for all fixed interest rate HECMs.

Mortgagors will be responsible for the payment of all property charges and no longer have the option to elect to require the mortgagee to pay such property charges on their behalf as provided in §206.205(b).

If a mortgagor fails to pay property charges, mortgagees shall proceed with the loss mitigation requirements announced in Mortgagee Letter 2011-01, as if the mortgagor has no remaining funds available under the mortgage.”

These are critical changes to the FHA HECM loan program and we’ll cover them in greater detail in future blog posts.

FHA Loan Credit Requirements For Co-Borrowers: A Reader Question

079A reader asks, “I have awesome income and FAIR Credit. My wife has Excellent Credit and low income. Can we qualify for a FHA mortgage with my income and her credit if we both apply? I live in Texas a community property state.”

FHA loan rules governing creditworthiness and FHA loan approval are found in HUD 4155.1 Chapter Four Section A. It states, “When determining the creditworthiness of borrowers, coborrowers, or cosigners, the underwriter considers their

• income
• assets
• liabilities, and
• credit histories.”

This may prove a problem for borrowers who have insufficient credit scores according to FHA or lender standards. The above quote from the FHA loan rulebook implies that the lender must consider credit and income from both parties.

In the case of a community property state, the laws of that state may require that both spouses include income data together for the purposes of loan approval. Or the state may have other ways of handling the issue–it all depends on the state.

According to FHA loan rules, borrowers with credit scores about 580 are eligible for maximum FHA financing.

However, the lender may have higher requirements, so the answer to this reader question basically depends on individual circumstances and the lender’s rules for loan approval.

It’s important to remember that FHA loan credit standards aren’t the only ones at work–the lender is free to add to or require stricter standards of creditworthiness as long as those standards are applied in accordance with federal laws such as the Fair Housing Act.

Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.